WASHINGTON ‑ Municipal issuers who do not comply with their continuing disclosure agreements should be penalized, the Municipal Securities Rulemaking Board told the Securities and Exchange Commission Monday.
In an 11-page, Aug. 8 letter on how the SEC should update its secondary market disclosure guidance, sent to SEC commissioner Elisse Walter, MSRB chair Michael Bartolotta said there is “limited accountability” for issuers who do not comply with their continuing disclosure obligations under SEC Rule 15c2-12.
Callers to the MSRB have “expressed frustration with the apparent unwillingness” of some issuers to provide audited financial statements within a reasonable time after their due date, he said.
“The board recommends that the commission consider issuing more interpretive guidance in this area and amending Rule 15c2-12, as necessary to impose consequences for non-compliance with continuing disclosure undertakings,” Bartolotta wrote.
While some issuers may miss their self-imposed deadlines to file annual financial and operating information because of circumstances beyond their control, such as natural disasters, “in other cases, noncompliance may result from a conscious decision to suppress unfavorable financial results,” he said.
In the case of issuers and borrowers that disregard their self-imposed obligations in continuing disclosure agreements, the SEC should require “much more robust disclosures in their official statements about their previous breaches” of their agreements, Bartolotta said.
“Another possible way to emphasize the importance of compliance with [continuing disclosure agreements] would be to require that [the agreements] include enforceable remedial steps to ensure that future disclosures are made appropriately, such as the adoption of specific procedures, granting investors direct enforcement rights (for damages as well as specific performance), engagement of professionals to assist in compliance obligations, or other concrete and demonstrable actions designed to encourage compliance without initiation of a lawsuit.”
Bartolotta also recommends the SEC require issuers file official statements for variable rate demand obligations and consider requiring disclosures on underlying borrowers of credit-enhanced transactions.
The commission is updating its 1994 interpretive release on issuers’ continuing disclosure obligations. Under 15c2-12, issuers are required to disclose annual financial and operating information as well as material and other event notices soon after such events occur. Issuers write their own continuing disclosure agreements, which typically appear in official statements, and set their own deadlines for releasing annual disclosures.
These agreements are considered contracts with bondholders and only bondholders can enforce them.
Commissioner Walter, who presided over a municipal securities hearing in Birmingham, Ala. late last month, is spearheading an agency-wide review of the muni market, including a staff report expected to recommend legislation, rules or rule changes, and industry best practices.
In a statement posted on the MSRB’s web site, along with the board’s letter, MSRB executive director Lynnette Hotchkiss said: “We appreciate the SEC’s continued commitment to issues affecting the municipal market and the opportunity to work with the commission to enhance investor protections.”
